The Challenges of Getting a Small Mortgage Loan

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Logic dictates that it’s harder to get approved for a mortgage loan when you want to borrow a lot more than what’s normally allowed. But the same can be true of small mortgage loans: If you need to finance less than $100,000, you might encounter difficulty.

Find out why getting approved for a small mortgage amount can be challenging, what criteria lenders value, minimum amounts permitted, ways to improve your odds of getting approved for a lower amount, and where to turn if you get turned down for a mortgage loan. 

Why getting a small mortgage loan can be difficult

Fact is, lenders are less willing today to green light mortgages that involve smaller borrowed amounts, and that’s been increasingly true since 2004. The Urban Institutev reports that, between 2018 and 2021, the number of mortgage loans originated with loan amounts less than $100,000 dropped compared to the number of mortgage loans originated with loan amounts of $100,000 minimum, which increased.

And according to Pew Charitable Trusts, only about one in four properties that sold for less than $150,000 were financed using a mortgage loan from 2018 to 2021 versus 71% of higher-cost residences.

What’s behind this trend? Small mortgages simply aren’t as lucrative to lenders as larger loans.

“Securing approval for a small mortgage loan amount can be challenging due to the lender’s profitability concerns,” says Matt Dunbar, senior vice president of Southeast Region at Churchill Mortgage. “The costs incurred by lenders for processing and servicing a loan are relatively consistent, regardless of the loan’s size. The smaller the loan, the less profit a lender makes from the interest charged. This issue is particularly pronounced in areas with high property values, where a small loan constitutes only a minor fraction of typical property costs.”

Dennis Shishikov, adjunct professor of economics at City University of New York, says “it’s a classic case of high effort for less reward from a lender’s perspective.”

Doug Van Soest, co-founder of So Cal Home Buyers, agrees.

“Low loan-to-value ratios can slam the brakes on your homeownership dreams. Lenders love juicy chunks of your property value backing their loan, meaning smaller mortgage requests often attract stricter requirements and result in getting declined,” he says.

Another factor driving lender hesitancy here is that it’s more challenging to find comparable property sales.

“In markets where property values are generally high, it becomes difficult to locate comparable sales at lower price points. This scarcity of comps complicates the appraisal process and can lead to reluctance on the part of lenders to approve smaller loans due to potential inaccuracies in property valuation,” notes Dunbar.

It’s about the loan amount, not the home’s worth

However, the struggle to obtain financing in these situations has more to do with the amount you want to borrow than the property’s value.

“Lenders often hesitate to provide small loans not because of the home’s worth but due to the lower returns on the smaller loan amount,” Shirshikov adds.

And this is true even if you plan to make a huge down payment. Say you wanted to purchase a home today listed for the current national median sales price of $387,600. This would likely represent a home of average size and quality—not necessarily a fixer-upper, cheaply made residence, or distressed property.

If you put down $300,000, thus requiring an $87,600 loan, you might still face difficulty getting the loan approved.

Minimum amounts lenders allow

While loan products often have limits on the maximum you can borrow, the minimum amounts allowed aren’t quite as clear.

“In the case of conventional mortgage loans, the typical minimum amount lenders are comfortable with is around $50,000,” Dunbar continues. “For FHA loans, the minimums are subject to regional variances, typically starting around $5,000 – although, in practice, they tend to be higher.”

VA loans do not have an established minimum borrowing amount, but lenders often set their own figure, usually aligning with the minimum permitted for conventional loans, per Dunbar. USDA loans have no official minimum but are subject to lender preferences, which often result in higher practical minimums – often starting at $50,000.

However, just because a lender may have approved a loan for $50,000 or less in the past doesn’t necessarily mean your small mortgage loan amount—even if it’s for a higher figure—will be okayed. Your lender will evaluate your loan application and eligibility as a borrower based on different criteria that are subject to change. 

How to improve your chances of getting small mortgage loan approval

To increase the likelihood of your small mortgage loan getting approved, it’s smart to follow best practices.

“Offer a substantial down payment, improve and maintain a strong credit score, and demonstrate a stable income and low debt-to-income ratio,” recommends Shirshikov. “In addition, seek lenders known for flexibility such as local banks or credit unions.”

Personal finance expert Baruch Silvermann, CEO of The Smart Investor, echoes that advice.

“Try talking to your own bank first. They want to keep your business, and explaining your situation to them might help. They’ll likely be more willing to assist loyal customers, especially those with higher amounts in their accounts. Banks value long-term relationships, so leverage that,” he says. 

Be sure to shop around and compare different lenders and loan programs carefully, as well.

“Also, consider requesting a slightly higher loan amount. Lenders might be more inclined to approve a marginally larger loan, as it is more profitable for them,” Dunbar suggests. “That doesn’t mean taking on more debt than you can handle but rather finding a balance that’s acceptable to both you and the lender.”

Alternatives to consider

Per Pew Charitable Trusts, when potential purchasers of lower-cost homes can’t get a small mortgage loan, they usually pursue one of three options: cancel or postpone the purchase (which usually results in renting or living with loved ones or friends), buy using cash, or resort to alternative financing options. 

If you got turned down for a small conventional mortgage loan, ponder applying for a government-backed FHA loan, for which the minimum loan amount may be as low as $5,000. Or, if you are an eligible veteran, military member, or surviving spouse, you may qualify for a VA loan; alternatively, if you can purchase a home in an approved rural area, a USDA loan may be worthwhile.

Already own a home and are pursuing financing to purchase a second residence? Think about tapping your first home’s equity via a home equity loan or home equity line of credit (HELOC).

The former may charge a higher fixed rate than a mortgage loan, and the latter typically charges variable rates after an initial fixed-rate period.

A secured or unsecured personal loan can offer another viable alternative. Unsecured loans do not require collateral but charge higher interest rates and have stricter credit requirements; secured loans provide lower interest rates but require collateral (like your home) you can lose if you default.

“Personal loans usually offer up to $50,000, but there are some personal loan lenders who provide up to $100,000, like SoFi or LightStream,” notes Silvermann. “The benefits of personal loans include faster approval times and less stringent eligibility criteria, making them particularly accessible to individuals with lower credit scores. However, both secured and unsecured personal loans have higher interest rates than mortgage loans, and the maximum loan amounts may be less than you need.”

You can also try getting a loan from a hard money lender, which focuses more on the collateral you put up than your finances and credit score. Just be prepared to pay more via this option, as hard money lenders usually charge higher interest rates and offer loans with shorter terms.

David Mully

David Mully is president and CEO of Lender Insider, a mortgage consulting firm. With 26 years in the mortgage industry, he has worked as both a mortgage loan officer and in the business-to-business sector of the industry. He is the former author of the weekly “Mortgage Search” column for Observer and Eccentric Newspapers. You can read his blog at http://www.lenderinsider.com/blog.

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